We seek certainty in all facets of our lives. But financial planning and life don’t have “laws” like physics. Financial planning is a game of probabilities. When we use financial planning software or any kind of software assistance in projecting anything, almost all outputs are measured in some sort of probability. But our monkey minds turn these probabilities into certainties and financial advisors don’t often help this confusion. But if we’ve learned anything, probabilities are not certainties.
In a financial plan, here are just a few variables that can drastically alter the advertised “certainty” - more appropriately, the probability - of reaching your financial goals.
- How long you will live.
- An increase in inflation rates.
- A long-term care event.
- Increases (and more importantly decreases) in equity returns.
- Increases (and more importantly decreases) in bond returns.
- The sequence of market returns.
- Tax rate changes.
- Social Security assumptions.
- Medical costs.
Putting together a financial plan is not a one-and-done experience. If we lived in a world of certainties, it would be, but we obviously live in an ever-changing world. There’s even the cliche statement, “The only constant in life is change.”
Old and tired statements become old and tired because they are true.
Amazingly, we could have made the above list much longer, and yet those were just a few of the external variables. But what about the “you-specific” variables? Those internal variables can impact your plan even more in some cases. A few examples:
- What if you make poor investment decisions?
- What if you decide you need/want far more (or far less) than you assumed?
- What if your children end up needing support?
Any single one of these variables can derail even the best of financial plans. On the other side, a change in any one of the variables in a positive direction may cause you to have far more money than you might have ever imagined.
Financial planning is a world of probabilities, not certainties. It’s why I focus on financial planning (the verb) as opposed to the financial plan (the noun). There’s a huge difference. This isn’t the same thing as the media’s ever-present plea of “5 Reasons You Should Make Changes to Your Portfolio Now.” It’s nothing like that.
It’s about managing the process. It’s about re-running the numbers on a regular basis (at least annually). It’s about observing your own life’s changes, your spending habits, your health, and your desires for the future.
It’s about reflecting on life and ensuring your spending is in alignment with your values.
Just take this as a reminder that no matter how you are going about your financial planning that it is a process, not an outcome. It’s about understanding that we exist in a world of probabilities, not certainties.
Action item: When is the last time you updated your financial projections based on the goals you have for your life? Given how crazy the last year has been, it’s probably worth taking another look.
Stay the course,
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This post is not advice. Please see additional disclaimers.